Dissolution of corporations with the SEC
In the dynamic landscape of business, corporations play a significant role in our economy. However, just as corporations are formed, they can also be dissolved due to various reasons.
In the Philippines, the creation and dissolution of corporations are governed by the Revised Corporate Code, or Republic Act No. 11232 (RCC).
The Securities and Exchange Commission (SEC) has also issued SEC Memorandum No. 5, series of 2022 to clarify the different modes upon which corporations may carry out the process of dissolution.
A corporation may have various reasons for deciding to dissolve and it by doing so, it ensures that the corporation is no longer liable for paying annual fees, filing annual reports, paying business taxes, and incurring business debts or liabilities.
The following discussion focuses on dissolution of the corporate charter with the SEC.
Note that aside from the SEC, the corporation will have to cancel its registration with other government agencies, such as the Bureau of Internal Revenue, the local government for its business permit, the Social Security System, Philippine Health Insurance System, Home Development Mutual Fund, Department of Labor and other agencies that may have regulatory supervision over the company such as the Bangko Sentral ng Pilipinas, Insurance Commission, and the like.
Automatic dissolution (Sec. 21, RCC)
If a corporation does not formally organize and commence its business within five years from the date of incorporation, its certificate of incorporation shall be deemed as automatically revoked the day following the end of the five year period. This is a change from the old Corporation Code which provided for a period of 2 years for automatic dissolution.
Voluntary dissolution w/o creditors (Sec. 134, RCC)
This type of dissolution is by way of submission of a petition with the SEC.
If no creditors will be affected by the dissolution of the corporation, it may be made by a majority vote of the board of directors or trustees and affirmed by a vote of the shareholders holding at least a majority of the capital stock of the corporation.
Twenty days before the meeting by the shareholders to approve the board resolution on dissolution of the corporation, a notice must be given to them. This notice must be published once before the date of the meeting in a newspaper in the area of the principal place of business of the corporation or in a newspaper of general circulation.
After approvals by the board and shareholders, the corporation shall file a verified request with the SEC for dissolution.
Among the documents to be submitted in support of the petition for dissolution are:
a. BIR Tax Clearance Certificate;
b. A secretary’s certificate that there are no pending intra-corporate disputes, and
c. If the corporation is regulated by a separate agency, such as banks, quasi banks, insurance companies, pawnshops, and other financial intermediaries, a favorable recommendation from the agency.
Voluntary dissolution where creditors are affected (Sec. 135, RCC)
When the dissolution of the corporation may affect creditors, it follows the same process above but with a few additional requirements. The petition must be verified and signed by majority of the board and verified by president or secretary or one director or trustee, it must declare the claims, demands and names of creditors against the corporation, and approved by shareholders who hold two-thirds of the outstanding capital stock of the corporation.
Interested persons or entities are given the opportunity to submit their objections to the dissolution and the order of the SEC shall be published once a week for three consecutive weeks in a newspaper of general circulation as well as posted for three consecutive weeks in three public places in the city and municipality where the corporation is located.
In resolving the petition for dissolution, the SEC may also direct the disposition of its assets or appoint a receiver to collect assets and pay the debts of the corporation.
In both instances above, shareholders of non-voting shares shall also be entitled to vote on the dissolution of the corporation. The dissolution of the corporation shall take effect only upon the issuance by the Commission of a certificate of dissolution.
Shortening corporate term (Sec. 136, RCC)
A corporation may amend its articles of incorporation to shorten its term and the requirements differ depending on the remaining term applied for.
a. The proposed expiration of the corporate term is one year or more from approval of the application for amendment by the SEC
The amendment is required to be approved by majority vote of directors or trustees and shareholders owning 2/3 of the outstanding capital stock including those holding non-voting shares.
b. The proposed expiration of the corporate term is less than one year from approval of the application for amendment by the SEC
The amendment is required to be approved by majority vote of directors or trustees and shareholders owning 2/3 of the outstanding capital stock including those holding non-voting shares.
An additional requirement is the submission of audited financial statements for the previous year except where the corporation has ceased operations as of the last year in which case the president of the corporation shall submit an affidavit of non-operation under oath.
There must also be submitted a Tax Clearance Certificate from the Bureau of Internal Revenue as well as publication of the Notice of Meeting at least once in a newspaper of general circulation.
Note that while in both cases the corporation will have to obtain the BIR clearance to close its business, the difference is the timing of when this clearance will be processed.
Applications to shorten the corporate term to one year or more from SEC approval does not require the submission of the BIR clearance to the SEC. It may process the retirement with the BIR and undergo audit after the SEC proceedings.
This is material in that obtaining a clearance from the BIR could be a tedious and lengthy process which may result in a longer process.
Upon the expiration of the shortened term, the corporation shall be deemed dissolved without any further proceedings. There is no more certificate of dissolution to be issued by the SEC.
Involuntary dissolution (Sec. 138, RCC)
The RCC also provides for involuntary dissolution where any interested party may file a complaint with the SEC to dissolve the corporation under the following grounds:
a. Non-use of corporate charter;
b. Continuous non-operation of a corporation;
c. There is a court order dissolving the corporation;
d. There is a final judgment that the corporation procured its incorporation through fraud;
e. Upon finding by final judgment that the corporation:
i. Was created for the purpose of committing, concealing or aiding the commission of securities violations, smuggling, tax evasion, money laundering, or graft and corrupt practices;
ii. Committed or aided in the commission of securities violations, smuggling, tax evasion, money laundering, or graft and corrupt practices, and its stockholders knew; and
iii. Repeatedly and knowingly tolerated the commission of graft and corrupt practices or other fraudulent or illegal acts by its directors, trustees, officers, or employees.
For involuntary dissolutions granted by the SEC based on the grounds in letter e. above, the assets of the corporation, after the payment of its liabilities, shall, upon petition of the Commission with the appropriate court, be forfeited in favor of the national government, without prejudice to the rights of innocent stockholders and employees and other penalties and sanctions.
(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco Siao Bello & Associates Law Offices, an Arbitrator of the Construction Industry Arbitration Commission of the Philippines, and teaches law at the De La Salle University Tañada-Diokno School of Law. He may be contacted at [email protected]. The views expressed in this article belong to the author alone.)
